No progress on reining in insurers

In this year's Union Budget, the Finance Minister has cancelled tax saving benefits on maturity from traditional insurance policies for which the aggregate annual premium paid is more than Rs 5 lakh. Those of us who understand how much damage the insurance industry does to its customers' finances have long hoped for some real controls to be placed on it. Let's be clear that this change has nothing like that - it's just the plugging of a tax loophole. This is about the government taking care of its revenues, not about it taking care of the savers getting ripped off by insurers and their agents.

It's just incidental that this change will make some types of financial harmful policies unattractive to some people. Moreover, these people will be amongst the richer victims of the insurance industry because anyone paying more than Rs 5 lakh annual premium for a single policy is by definition rich. Insurers and their agents are free to target all those who can pay annual premia of up to Rs 4,99,999. So basically, there's no move at all on reining in this industry.

In fact, let's be clear on one thing. Except for one round of somewhat meaningful fixes applied to ULIP regulations more than a decade ago, there is no official acknowledgement - or indeed, awareness - of the real financial problems that the insurance business creates for crores of savers in the country.

What Indians need is meaningful amounts of insurance. When I say insurance, I mean real insurance, as in the money that survivors will get if an insured person dies. The other real product we need is annuity. Basically, these are the two protections that we need. One, from dying too early without enough savings. And two, that of living too long without enough savings. Protection of the people from these two financial disasters are the entire job of the insurance industry.

Instead, in the guise of real insurance, what we have is an opaque, high cost and poorly performing asset management service. Moreover, the nature of the insurance contract is highly confiscatory. If you can't pay an instalment, you lose a substantial chunk of your money. Since the insurance part and the investment are bundled together, you lose life cover as well as your returns and principal. This does not happen in any other kind of periodic investment like a mutual fund SIP or a recurring deposit. In those products, if you can't pay one or two instalments for whatever reason, it's fine. You still have the principle and the earnings from whatever you paid. This punitive confiscation is considered entirely acceptable by the insurance regulator as well as the government. To any thinking person, this is clear evidence that these institutions have either not understood the problem, or they don't care, or they have been fully house-trained by the insurance companies.

Curiously, many savers are also unable to see these problems. For example, the ultimate no-brainer in personal finance is term insurance. Anyone who has an income and has dependents should have term insurance equal to around 10 times current annual income, and yet there is a great deal of resistance among many people against buying something that doesn't give back anything. This behaviour is actively taught by insurance agents. For decades, if a customer asks about term plans, the agent would always say that you won't get anything out of it, implying that I'm saving you from a financial stupidity because I have your interest at heart.

The complete lack of any meaningful genuine reform in insurance is the most disheartening aspect of India's financial regulation. In practically every other area, from banking to mutual funds to the equity markets, there is an active regulatory effort to solve customer problems and to improve services. Insurance is a sad exception to this. The only thing is that more people understand this now and so can defend themselves against the insurance industry with this knowledge. However, this is hardly enough.

Suggested read: How to actually reform insurance